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The International Monetary Fund (IMF) has again downgraded its outlook, reducing its forecast for global growth by 0.1 percentage points to 3.5 percent this year and 4.1 percent next year. For Europe, in particular, there is not much good news:

European growth has been marked down 0.3 percentage points to -0.2 percent in 2013, a second year of decline. The IMF optimistically forecasts a gradual pickup in Europe later this year, but also sees Europe as the key downside risk to the outlook.

Advanced economy exports have been marked down 0.8 percentage points to 2.8 percent. Last year, the improvement in the current account performance of the European periphery came through stronger exports to non-European countries rather than to the European core. It is hard to see how exports can be their locomotive for growth going forward.

The European downgrade reflects “delays in the transmission of lower sovereign spreads and improved bank liquidity to private sector borrowing conditions.” That’s key: private sector lending is down 0.5 percent over year earlier levels with little sign of a pickup. In other words, banks are strengthening their balance sheets in part by not lending. As long as Europe continues to face headwinds from fiscal drag, private sector deleveraging, weak export demand, and bank lending constraints, the outlook for growth and debt sustainability in the periphery will remain grim.

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